Tech Tonic Sports Drinks Case Analysis

Tech-Tonic Sports Drinks

Most Appropriate method
There are two options to recognize the costs due to lost goods

1. Bury them into per unit costs of completed and in process units
2. Identify them as lost units

The second option would be the correct one, we should calculate the value of cost of goods lost same
as cost of goods completed, since the mistake of adding too much sodium was not identified till the end
of the production process. Further the loss happened during a period, and does not actually increase the
cost of manufacturing the other units completed and those that are WIP.

Profit calculations
First, we need to identify costs associated with WIP, Cost of goods completed and Cost of goods lost

WIP start of April

Direct material: 100% complete, cost 105000
Conversion: 50% complete, cost 135000
Balance WIP 240000

Units started in April 600000

Units completed in April 300000
Units Lost in April 300000
WIP, end of April 150000
Direct material: 100% complete
Conversion: 20% complete

Cost incurred in April

Direct Material 420000
Conversion Cost 1161000

Equivalent Units
% completion
Physical Units conversion Direct Material Conversion
WIP, Beginning of April 150000 50%
Units started in April 600000
Total Units to account for 750000

Units completed in April 600000 100% 600000 600000

WIP, April end 150000 20% 150000 30000
Total Units accounted for 750000
Total equivalent units 750000 630000

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 Tech Tonic Sports Drinks Case Analysis

Direct Material Conversion Total

WIP, beginning of April 105000 135000 240000
Cost incurred during April 420000 1161000 1581000
Total Cost 525000 1296000 1821000
Equivalent Units 750000 630000
Costs per equivalent units 0.7 2.057142857 2.757142857

April Ending WIP

Direct Material 105000
Conversion 61714.28571
Cost of Ending WIP 166714.2857
April Completed
Direct Material 210000
Conversion 617142.8571
Cost of goods completed 827142.8571
April Lost goods
Direct Material 210000
Conversion 617142.8571
Cost of goods lost 827142.8571
Total Costs 1821000

Method 1:

Bury costs in cost per unit of completed and WIP goods

Cost allocation per unit= Cost of units lost/ (number of units completed + number of units in
WIP) =827142.85/ (300000+150000) = 1.838
Therefore, extra cost per unit of completed goods is $1.838
Total cost per unit of completed goods=$1.838+$2.757 = $4.595
Cost of goods sold =80% of completed goods*$4.595=0.8*300000*4.595 = $1,102,822.8
Profit = 15*300000*0.8 - $1,102,822.8= $2,497,177
Method 2:

Add cost of goods lost to cost of goods sold

Cost of goods sold= 0.8*300000*2.757 + 827142.85 = $1,488,822
Profit = 15*300000*0.8 - $1,488,822 =$2,111,177
Profit from method 1 is greater by $386,000 in April

Decision Management would have Taken

As a Manager whose Bonus is determined by profit, one will go with the option of burying the costs in
unit prices of completed goods and WIP to smooth over the earnings to show a higher than actual profit
in the first period and a lower than actual profit in the second period

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